[Watch] The Changing Landscape of In-person Banking

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Bank branches in the US have been closing steadily for over a decade, but that trend accelerated during the pandemic. Online and digital banking may be out of reach for those without digital devices, broadband, and digital literacy skills. A lack of access to physical banking services can create banking deserts, or geographical areas where there is a significant lack of access to traditional bank branches. Lack of access to physical branches may create challenges for lower-income, rural, older, and disabled customers, and can restrict opportunities to improve their financial health and build wealth.

In this Connecting Communities webinar, experts shared research on bank branch closures and the value of in-person banking. They also discussed the Fed’s Banking Deserts Dashboard, which analyzes where the deserts are (and could potentially be) located. A panel of experts also shared potential solutions for grappling with these issues.

Speakers

Transcript

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Sydney Diavua

Good afternoon, and welcome to Connecting Communities. Thank you for joining us for today’s webinar, the Changing Landscape of In-Person Banking: Implications for Financial Institutions, Regulators and Communities. I’m Sydney Diavua, assistant vice president for community development at the Federal Reserve Bank of St. Louis, and I’ll serve as your moderator for today’s session.

I would now like to take the time to introduce our speakers for today. Mike Anderson, Senior Vice President for BankOnBuffalo, a division of CNB Bank. Mike leads office operations for the Tim Branch Network and has played a critical role in the growth of BankOnBuffalo in the Western New York market.

Alaina Barca, Community Development Research Analyst at the Federal Reserve Bank of Philadelphia. Alaina supports research and topics that impact how communities develop and grow.

Caleb Bobo, Supervisory Examiner at the Federal Reserve Bank of St. Louis, where he manages the CRA examination function. He’s also a doctoral student at St. Louis University studying consumer behavior and retail banking.

Wes Burns, Executive Vice President at Midwest Bank Center. Wes leads and implements the institution’s activities to expand access to opportunity and capital for traditionally underserved groups.

And Miguel Lopez, Marketing Strategy Executive for Southern Bancorp. Miguel leads the strategy and outreach behind the CDFI’s expansion of services for Hispanic and Latino customers and prospective customers within its current banking footprint and beyond. Before we get started, let’s move to slide four where we can take care of a few housekeeping items.

Views expressed during this session are those of the speakers and are intended for informational purposes only. They do not necessarily represent the views of the Federal Reserve System or Fed Communities.

Today’s session will include information on the Community Reinvestment Act only as it stands today. Microphones have been muted. Please use the Q&A feature throughout the session to submit questions. We promise to get to as many of them as possible during the Q&A portion of the presentation.

Keep the conversation going and engage with us on X, formerly known as Twitter, using the hashtag #connectingcommunities and visit fedcommunities.org for a variety of CD articles, resources and data across the Federal Reserve system. And finally, the session will be recorded, and the presentation, video, and podcast will be available on fedcommunities.org within two weeks of this event. I would now like to turn the presentation over to my Philadelphia Fed colleague, Alaina Barca. Alaina, the floor is yours.

Alaina Barca

Thanks Sydney for the introduction and thanks to the Connecting Communities event team for having us, and to everyone joining us online today. In today’s webinar, we’re going to discuss recent changes in the landscape of bank branches across the country, what that could mean for consumers, and how some financial institutions and regulators are thinking about it and responding to it. I’m going to kick us off by setting the stage of what we know about bank branch trends. On the next slide, we show the number of bank branches across the US for the last 15 or so years. And what the chart shows is that the number of active bank branches across the country was on the rise for most of the 2000s. But around 2009, after the great recession, the number of branches began to steadily decline. And during the pandemic, the rate at which branches were closing accelerated even more.

We don’t know exactly what the impact of these closures is on consumers’ access to banking, but we do know that certain consumers have stronger preferences for banking in person, including lower income, rural, older, and disabled consumers. Plus, if someone doesn’t have full access to digital connectivity, including access to broadband, a device, and digital skills, they might not be able to bank online as easily as consumers that have all of those tools. So this trend of bank branch closures, particularly its acceleration in recent years, could have some serious financial inclusion implications. And in order to better understand how this trend is showing up across communities, it helps to use a standardized measure of bank branch access. At the Philadelphia Fed, we’ve been conducting research about banking deserts where we’re doing just that.

We’re using a measure of bank branch access, which in our case is banking deserts, to study where bank branch closures are leaving geographic gaps. And we’re studying whether those gaps differ for the groups I mentioned earlier who may prefer or need to bank in person as well as more generally whether they differ in places with more unbanked and underbanked populations. So on the next slide, we show how we’re defining banking deserts in this work. We use a measure of banking deserts by census tract. A census tract is an area with about 4,000 people in it. You can think of it like a neighborhood. So a banking desert is a census tract without a bank branch within it or within a certain radius from its population center. And that radius varies based on the type of tract, since transit and travel distances can differ a lot across different geographies. So if the census tract is in an urban area, the radius we draw around it is two miles. If it’s suburban, we use a five-mile radius. And if it’s a rural tract, we use a ten-mile radius.

We also use the term potential banking desert to identify tracts at risk of becoming a banking desert. And those are tracts with only one bank branch within them or within that same radius. You should see an option to complete our first polling question, which asks how far the bank branch is from the neighborhoods that your organization serves. If residents in the communities you serve need to travel further than two, five or 10 miles to a bank branch, depending on whether they live in an urban, suburban or rural community, they might live in a banking desert. While folks fill out that poll, I’ll jump to the next slide. So using this definition of banking deserts, findings from our recent research showed that since the onset of the pandemic, the total number of bank branches in the US declined by 5.6%. The number of banking deserts increased by 217, up to about 3,600 tracts, and the population living in deserts increased by over 760,000, up to about 12.3 million people living in a banking desert.

We also show in our research how these results differ across different communities and that there’s quite a bit of nuance in the trends. For example, most deserts have been forming in higher income suburban and predominantly white areas, but the pace of desert growth in predominantly black communities was faster than the national average. Residents of majority American-Indian and Alaska native communities were 12 times more likely to live in a banking desert in 2023 compared to the national average. And populations living in areas with low device or broadband access, as well as areas with high concentrations of older or disabled residents, were all more likely to live in a banking desert too. Next slide please.

So big picture, the research shows that banking deserts are on the rise and how they show up across communities is localized. We wanted to give stakeholders of this work the ability to explore their community’s banking deserts for themselves. So we partnered with Fed Communities and Fed system colleagues to create an interactive mapping dashboard of banking deserts across the country. I’m going to jump over to the dashboard to do a quick demo of its features. The Banking Deserts Dashboard is publicly available on Fed Communities website, and when you get to the page, you’re greeted with some background information on banking deserts. When you scroll down, you can see the dashboard and you can make it full screen. We prioritize accessibility in our color palettes, so the dashboard maps, banking deserts in red, potential deserts in blue, and areas that are neither in gray.

There’s dynamic text at the top that changes when we filter for state and year. That tells us the proportion of census tracts in a geography that are deserts and potential deserts. The rural-urban breakdown, the percent with limited broadband access and a race ethnicity breakdown as well. We can filter by state, so I’m going to filter for Indiana. We can highlight a county, so I’m going to highlight Marion County. And we can zoom in to identify the communities that we’re interested in, so I’m going to zoom in to a census tract in north Indianapolis, Indiana. And when I hover over the tract, we can see that in 2023, this census tract is a banking desert, that the closest branch is two miles away. And we can also see demographic information about the tract including its population, majority race, whether it’s a low to moderate income tract and the percentage of residents without access to broadband.

If I wanted to know when this tract became a desert, I could go back as far as 2019. And when I do that, you’ll see that in 2019, this tract wasn’t a desert or a potential desert. It actually had three branches within its radius. If we change our year to 2020, we can see that by the end of 2020, two of those three branches had closed and the tract became a potential desert. And finally, when we jump to 2021, we can see that this tract became a desert by the end of 2021. So that last branch has now closed and residents of this community have to travel more than two miles to get to the closest bank branch. That’s a high level overview of the functionalities of the dashboard. We also have resources on the web page about trends, definitions, and related publications, as well as a fully public supplemental data appendix available for download at the very bottom of the page. I’m now going to pass things over to Caleb to talk more about research on the importance of bank branches.

Caleb Bobo

Thanks Alaina, and thanks everyone for spending your afternoon with us today. I’m really excited to be here to be talking about bank branches and their importance to communities. I want to reiterate that while I have the privilege of serving as a supervisory examiner here at the Federal Reserve Bank of St. Louis in our consumer affairs unit, I will be speaking first as a PhD student who studied consumer behavior and retail banking, and specifically the current and future state of bank branches. I think we have a poll question, so let’s go ahead and deploy that poll question. And the poll question is related to how do consumers think about bank branches and financial technology today? The question is trying to get at what is keeping consumers from accessing their bank accounts, their financial statements, et cetera, online.

So while that question is up, let me reiterate the disclaimer at the beginning that I will be speaking as a student, as a PhD student and not on behalf of the Federal Reserve Bank of St. Louis or the Federal Reserve system. We will go ahead and leave that polling question up for a few more seconds as you read through the options. And we will go ahead and close it here in three, two and one. And I will give you the answer here in a few slides, so a little bit of a cliffhanger. So let’s go ahead and move to the next slide and we will go ahead and get into research. So the goal of these remarks is to really provide the audience with a high-level overview of the current state of bank branch research. But before we get into that, I’d like to tell a quick story. So you should see a beautiful couple on the screen. Let’s call them, I don’t know, Caleb and Sabrina Bobo, a pseudonym of course.

And what I think is interesting about this couple is while they are married, they are of the same race, they’re the same age, both formally educated, they have vastly different banking behaviors. Caleb is someone who goes to a bank branch almost once a month, who frequently finds himself in in-person banking conversations, visiting ATMs or bank branches while Caleb’s wife, Sabrina, is someone who has gone to a bank branch only twice in the last year and only goes to a bank branch “if she really has to.” And I share that story, not necessarily because antidote is data, but to say that there is nuance in how consumers, customers think about in-person banking, place-based banking. And it’s not as easy as saying young people bank one way or Black people bank another way, but there’s nuance. And because there’s nuance, I think it is ripe for additional research.

Let’s go ahead and go to the next slide. Over these next few slides, I’m going to try to make some arguments by providing you a summary of what the academic research is saying about bank branches. The first thing that I think the research is pretty clear on is that bank branches matter, specifically proximity to bank branches. The academic literature says that the closer you are to a bank branch, the more likely you are to hold a deposit account at an FDIC insured financial institution. It also says that if a bank branch is in your community, your community is more likely to have mortgage lending. That means consumers, households and individuals benefit from having proximity to a bank branch. Commercial clients also benefit from having a bank branch in their community. Credit is cheaper and available for a longer period of time if a bank branch is in proximity.

And interestingly, the inverse is also true as well. As distance increases from the nearest bank branch, or if a bank branch closes, there’s a negative effect on commercial credit. So what that at least seems to imply is not only is having a branch important because it makes your costs lower if you are a small business owner, but if a branch closes or becomes more distant, it also has effects just on the negative side. And then lastly, and arguably most interestingly, is research has shown that banks benefit from having branches in communities. Deposit accounts that are opened in person are more loyal account holders and they have more dynamic relationships. Meaning if I open my savings account in person at a bank, I’m more likely to come back to that same bank to apply for a mortgage loan or apply for a car loan. So there are benefits not only to the customer to having a bank branch in proximity, but there are also benefits to the financial institution for having a bank branch in proximity as well.

So what I hope this shows at a very high level is that at least the academic literature says that proximity to a bank branch matters quite a bit for households, individuals as well as small business customers. Let’s go ahead and go to the next slide because the inverse is an interesting question as well. So this next slide should be trying to make an argument about, well, can digital banking replace in-person banking? I’m of the belief that it can’t, but I think there’s an argument to be made, especially in the case that Alaina just so well described in that bank branches are declining. And some research has even found that online and digital means are a semi-effective way in providing banking and financial services to customers, but there are some qualifiers that I think are important.

Those who do the majority of their banking online tend to be younger, more formally educated and more fluent, while those who prefer to bank in portion are typically older and more likely to live in rural areas. The second thing that I think is at least a weakness in the argument that bank branches can be replaced by digital means is this idea that it’s just the perfect option and as long as it is good, it will be accepted and adopted by customers. But the answer to that poll question is in that second sub-bullet, that there is a very clear bend in the research that says a customer’s belief that online banking is risky or their lack of trust in the platform will prevent them from adopting financial technology.

Okay, sorry. So where was I? Okay, so yes, alternative financial services providers can fill in the gap if branches leave. And that is problematic because they charge high fees and they hurt customers. So what at least the challenge is with this argument is that bank branches matter and they cannot easily or completely be replaced by digital means. Let’s go ahead and go to the next slide, and I’ll do these quick so we can get into the panel because I know we have great panelists to offer some insights to us. But what I hope these quotes offer you is a call to action for the researchers, for the policy thinkers or the analysts in the room that we need more research on bank branches specifically, but the banking and financial services industry more generally. It’s important to how we think about regulation, how we think about policy as well as that’s development.

But I may add, and this is the second quote on the screen, is that qualitative research here matters quite a bit. Banks are not only in the business of numbers, but in the business of people. And the best way to study people is through qualitative means, whether that’s ethnography, grounded theory, phenomenology. The more we can get into the nuance, whether that’s through interviews or observations, the better off we will be as researchers and ultimately as regulators and policymakers if we have really good research studying these phenomena. Let’s go to the last slide and I’ll make one more call that this research matters, not only generally, but right now we’ve seen a lot of trends. Again, Alaina walked us through several of them.

Bank branches are closing, but that may be plateauing. We see the largest bank in the country opening 500 new branches across the country. We see smaller community banks maintaining or growing their branch footprint while larger institutions are closing their branches. There’s just a lot of there-there. And to the extent we can lean in and do some more digging into this topic, I think the better off we will be as a community as well as the better off regulation and policy will be as well. So let me stop there. It’s impossible to do such a rich topic justice, but I will pass it back to Sydney and we can start discussing through with our great panelists.

Sydney Diavua

Thanks so much Caleb, and thank you for taking us through your presentation. And I’d like to invite our other panelists to join us on screen, Wes, Miguel, Mike. And as our panelists are joining us on screen, we’d like to poll the audience to learn a little bit about you. You will see another poll appear on the screen, and we want to know what type of organization do you work for? The options are financial institution, non-bank financial institution, regulatory agency, community organization, or other. And so we’ll give you all a moment to fill out that poll. And just want to say thanks for helping us know who’s in the room.

And I’d like to transition us to our panel to hear a little bit more about how this is happening in practice in the field for financial institutions. And so welcome Miguel, welcome Mike, welcome Wes. Caleb, thanks for sticking around with us. You all represent a cross-section of financial institutions that are serving a variety of markets. And I’d like to start with just having you all tell us a little bit about yourselves, your institutions, and to answer this question, why and in what ways does your institution prioritize bank branches? So Mike, I’ll start with you.

Mike Anderson

Thanks Sydney, and thanks for allowing me to be a part of this session today. I work for BankOnBuffalo, a division of CMB Bank. CMB Bank is a $5 billion asset bank in central Pennsylvania that has divisions operating in four states, including Virginia, Ohio, and up here in Western New York. And as my role as the head of retail for the BankOnBuffalo division, we uncovered… Even in Western New York, we have the city of Buffalo, Erie County, which is the major urban metropolitan area in this region of the country, but also we also have a lot of rural regions, suburban and urban and included in those are several bank deserts. And one of the things that we tried to accomplish there was as a small community bank, we’re not going to be that bank that has 35 brick and mortar locations, but we still want to be able to have outreach to all different types of communities throughout Western New York.

And after several years of research with local community organizations, local religious organizations, community leaders, we came up with a concept of a food truck, a banking truck concept. We call it BankOnBuffalo Mobile Banking. And so our bank on wheels currently right now is going into several urban areas that we consider bank deserts, whether to Alaina’s research, there isn’t a branch within two miles of that urban area. And we are providing a full-on banking services. We literally are a bank on wheels. We have a teller station with an ATM and even a desk that you could sit down and apply for a mortgage. Anything you can do in a branch, whether it’s wire money, apply for a mortgage, just withdrawing money from a teller, to withdraw cash out of the savings account, we can do that. And it took a couple years to research that and find out where the right spots, where the right locations, who needs it the most. And we thought so far we’re very proud of the work we’re seeing so far.

Sydney Diavua

Thanks, Mike. Wes, I’ll come to you. What’s happening at Midwest Bank Center?

Wes Burns

Well, good afternoon and yeah, thank you for having us on as panelists. This is a privilege to share the research that we found in our different markets. Primarily with Midwest Bank Center, we’re in the St. Louis region St. Louis Missouri, which does have a lot of possible banking deserts, if you look at the research that Alaina provided earlier. Personally, I grew up in a very rural community that is a possible banking desert. If you look at the one branch that’s in a close proximity to the small community I grew up in, so this is near and dear. It’s been that way for many, many years. If you look at where we are in St. Louis, Midwest Bank Center has been in the St. Louis region since 1906. We are really are the pinnacle of community banking, a 100 plus year old institution, privately owned, family owned, and we have 16 banking locations throughout the region.

We’re a $2.7 billion bank, and we’ve grown most of that organically over the years. If we look at the priorities of Midwest Bank Center specific to our branch network, we say one of our phrases is we serve the entirety of our region. And by saying that, we have to do that. That means we have to be part of our communities that we say we’re serving regardless of affluence, regardless of the accessibility that those consumers might’ve had. So we’re proud to say of those 16 branches, roughly half of those are in low and moderate income communities. Most of them are. We have a presence in the North County communities. Ferguson, Missouri is hit the news media several years ago for terrible tragedies, and we just recently opened a location that serves the Ferguson community and the neighboring community of Dellwood.

So it’s been our intention to live in to the saying that we serve the entirety of our region by being present, being part of our community, staffing from the stakeholders of the community, the people that you would go to church with, that your kids go to school with, community stakeholders that are leaders and trusted advisors. So when we look at our strategy behind our branch network, we have to be buy-in of and from our communities in order to effectively serve them.

Sydney Diavua

Thanks, Wes. And it feels like I’m starting to hear a bit of a trend here from you and Mike on serving the entirety of the community. Miguel, I’ll come to you to talk a little bit about your work and about Southern Bancorp.

Miguel Lopez

Thank you. Well, first I want to thank the St. Louis Fed and the Philadelphia Fed for this. This research is important. It’s vital as Caleb eloquently stated. It’s also near and dear to who we are as a financial institution. We are one of the oldest and largest CDFI banks in the nation. My role here as a market strategy executive is really positioning the bank going into our expansion markets and helping us bank the Hispanic community and delivering our promise to be wealth builders for all of us. This topic is so interesting for us because in 70% of our markets where we’re in, there’s less than 25,000 people, so we’re in very rural communities. And in fact, in nine communities that we’re in, we’re the only bank in town, so we’re that last bank in town, if you will, propping up the financial institutions.

And Caleb’s research does such a good job, but we see it every day with our customers. Branches are more than just a place to go park your money at night. They’re opportunity centers and they are places where you build relationships with your local banker that really help you build assets and get you on that path to upward mobility. So we’re really proud of the work we’re doing in our communities. We’ve got 56 branches in Arkansas and Mississippi, over 65,000 deposit customers, but really proud to be here and be a part of this conversation because this is something that we’re fighting with day in and day out.

Sydney Diavua

Thanks, Miguel. I want to know a little bit more about who’s using bank branches, and so we heard a little bit from Alaina and Caleb, but can you all tell me who’s the typical consumer who comes into your branches? How about you, Miguel?

Miguel Lopez

Yeah, I’ll go first. For us, like I said, in some communities we’re the only bank in town, so we see the pharmacist, the doctor, the affluent folks in town, and then we also see the single mom with four kids walking in. I think that’s why it’s so important that we stay in those communities because we really are serving everyone in those communities. So that’s who we see. As we go into Little Rock and major urban markets, we’ve realized that just because there’s a plethora of banks in those communities, that doesn’t mean that there aren’t quarters or pockets of the city that is unbanked. And that’s where we’re wanting to go in those niche markets like a Little Rock, maybe other larger cities in the future because we realize that just because there’s a bank in town, if you don’t have those intentional bankers that have responsive and reactive credit products for the community, it’s going to be really tough to bank them.

Sydney Diavua

Is that similar for you, Mike?

Mike Anderson

Yeah. I agree with Miguel. We still see a cross-section of our population coming into the branches. We still see maybe a senior citizen that’s coming in once a month that withdraw from their social security direct deposit. We might see small business owners have cash needs, so we’ll see them on a weekly, maybe even a daily basis. I would say the majority of the branch visitors on a weekly basis who are regular, so to speak, maybe are more elderly because they’re more… I shouldn’t say elderly, but older demographic because they’ve built those connections and maybe they’re less exposed to the alternative delivery channels or digital banking. However, great to see Caleb’s research because we still see younger demographics. More than 50% of our new accounts opened every year are opened by people that are 44 years or less.

So they’re still coming into open the accounts. They need that personal touch, that personal connection, but we might not see them as frequently. We might see them maybe a couple times a year once they open their accounts. Same with a mortgage customer. We help people with life events. So people having their first baby, buying their first home marriage, divorce, the loss of a loved one, those are where they need that trusted advisor, that banker, they need the place that they have that personal connection. And like we saw with COVID, as humans, we need that personal connection. When we were isolated for those months, there was so much research done, so we need that human touch. And so that’s the same with banking. I just think there’s certain demographics or certain trends where certain people use branches less than others, but still there is a need for the branches.

Sydney Diavua

I appreciate what you’re saying and bringing in that point about connections, how branches are connecting the consumers to you all, but also it’s just that personal connection that’s important in it. Wes, did you have any other thoughts?

Wes Burns

Yeah, just a brief add-on here. I think Miguel and Mike said it well, but I would summarize it with any demographic that really has barriers to accessing financial services or who we’re seeing. St. Louis is blessed with an influx of Bosnian residents about 30 years ago with the war torn communities, and they didn’t understand the banking community here in St. Louis, and we had very progressive leadership at that time that we staffed accordingly with bilingual Bosnian-speaking employees and served that community very well. You can replicate that with the Hispanic community, the Asian focus. Time and time again, there are barriers that exist not just with technology issues or proximity to a bank location, but barriers that are at times situational.

And what we have found that staffing accordingly with bilingual employees, that’s created generational loyalty, now in second generation of the Bosnian refugees that are immigrants to our communities. They’re coming in. They’re coming in daily. They’re appreciative that we were there to serve them 30 years ago and still are today. So just in summary, I think anyone that does have a barrier in some form or fashion are those that we’re seeing every day.

Sydney Diavua

Caleb, I want to bring you into the conversation and just hear a little bit about your perspective as an examiner. How does a bank’s branch footprint or their branch distribution fit into a compliance examination?

Caleb Bobo

Certainly, and it’s a great question. Branches matter in two primary ways to a bank’s compliance or risk portfolio, if you will. The first is on the fair lending side where we’re looking to ensure banks are not discriminating against customers based off protected classes articulated in things like the Fair Housing Act or the Equal Credit Opportunity Act. And the second is via the Community Reinvestment Act. In both, we are looking at a bank branch’s distribution across either low, moderate, middle and upper income census tracts and the terms of the community Reinvestment Act or across majority minority census tracts and non-majority minority census tracts on the fair lending side, and our examiners are trained to look for disparities that cannot be explained by business model or other things like that. We’re also looking at the bank’s record of opening and closing branches in both of those geographies to ensure that the bank is not pursuing a branch reduction strategy that is discouraging access to banking and financial services for one of those communities.

And then lastly, our examiners are trained to look at the availability of products and services offered at each branch across, again, either low, moderate, middle and upper income census tracts or minority census tracts versus non to ensure that a bank is not, for instance, offering loan officers in middle and upper income census tracts, but not offering loan officers in low and moderate income census tracts. That work is done diligently. It’s done with a lot of context through a lot of conversation with the financial institution, but if there are disparities, if there are issues, it could hurt a bank’s CRA rating and/or fair lending examination. So it’s tied over both and they’re looked at from different perspectives. But our exam staff on the compliance side are really intentional about ensuring that these are priorities in our examinations and therefore we are examining for compliance in according with our exam procedures as well as the letter and spirit of the Community Reinvestment Act in addition to fair lending laws and regulations.

Sydney Diavua

Caleb, thank you for that high level overview. And I know that you could go very deep into all of the mechanics of this, and so I appreciate you being able to summarize that for us. I’m wondering how this plays out for a financial institution. Wes, how does your branch footprint and strategy intersect with how your institution’s thinking about fair lending and CRA strategy and CRA compliance?

Wes Burns

Well, I agree wholeheartedly with Caleb’s comments there. Our branch network is essential to our fair lending, CRA, HMDA, all of the efforts to ensure that we’re providing equal access to capital throughout our region. We found that if you’re not in a market, it’s hard to serve that market. If you’re not physically there, the likelihood of you ending up extending capital in a community that you have no presence in is very low. So we’ve been extremely intentional over the past 12 years. We’ve opened three new branches, all three within low to moderate income census tracts, and we’ve found that organically, almost as a byproduct, us being present in those communities, our HMDA and CRA numbers are organically higher, again, almost as a byproduct of doing the right thing and being in the communities that you say you’re serving. So in summary, it’s essential in order to achieve those goals.

Sydney Diavua

Mike, I see you came off mute, how does this interact with your strategy?

Mike Anderson

The same with Wes. We make sure from a HMDA and CRA standpoint that we’re serving all communities, but our strategy really when we get into the LMI areas or in some of these census tracts, our strategy is try to break the poverty cycle. So where we seem to hone in on is home ownership. If we can come to those communities and try to encourage and develop home ownership, we feel like that’s one of the best tactics to try to break the poverty cycle and try to create a generation of wealth. And by doing that, that is, to what Caleb said and what Wes said, we have full resources in some of these LMI areas. We’ve built a branch in some of these areas. We have the mobile banking unit going into some of these areas. We’re doing advertising and marketing and digital advertising in all regions, whether it’s rural, suburban, urban, that we can offer this product everywhere. Everybody’s eligible to this regardless of what your zip code is.

And I think really with the focus on home ownership and the trend of bank-on accounts, we have non-overdraft no-fee checking that we can provide. So some of these citizens in some of these census tract or LMI areas are got knock getting nickeled and dimed and getting nuisance fees that we’re really trying to create trust back in a community bank or trust back in financial institutions so that we can develop a relationship, have them do their main banking with us, and then hopefully help them through their life cycles of buying a home and creating starting that wealth cycle for these neighborhoods.

Sydney Diavua

Thanks, Mike. And you’ve already started to share a little bit about where I’d love for our conversation to go next. I see a lot of questions starting to roll in, and so to our attendees, please keep them coming because we’re going to come to you all next. But you started to talk a little bit about the innovations, the mobile banking centers. Miguel, I was reading about Southern’s branch resistance strategy, and I would love to hear more about that, especially how that works as you’re being responsive to rural communities.

Miguel Lopez

Absolutely. Well, for us at Southern, we call ourselves wealth builders. We’re more than just bankers. And the reality is the key to our mobility, which is the quintessential American dream, you really need a strong financial partner in your corner. And some of our bankers focus on mortgage lending. We’ve just hired a mortgage company, and that’s going to drive a lot of our growth going forward because to Mike’s point, that’s the fastest way to achieve generational wealth. But not everyone’s borrowing-ready. We also have financial counselors. Those are salary employees and their whole job is to work on people’s credit because that’s typically the biggest barrier. We also have a down payment assistance programs, which typically the biggest barriers to home ownership is, hey, I don’t have the credit where I don’t have the money down. We want to knock those barriers down so that we can get folks in homes.

But in regards to our branch strategy, like I said earlier, we have 56 branches in very rural communities. And in those markets, we’re more than just a bank. We have a nonprofit Southern Bank community partners where we do things like vital returns. We partner with the IRS to do free tax returns. This year, we did 4,719, and that was around $7 million of free tax returns in people’s pockets. We also have credit builder CDs. So really it’s who we are. It’s at the ethos of why we were created as an institution, as a CDFI bank. We just opened a branch in 12th Street, which was a banking desert in Little Rock. There hadn’t been a financial institution in that area for 30 years. And instead of going elsewhere, we went right in the heart of that community. We said, “Hey, there needs to be a bank there and if not us, who?” So that’s really our model is, but it takes more than just building that branch because then you’ve got to staff it.

And I think Wes had a great point earlier, your branch employees need to reflect the communities that they serve. And oftentimes when you’re the only bank in town like we are, it’s not who you’re competing with because there is no competition. It’s what you’re competing with. And that’s cultural nuances, trust, language barriers. And for us as an institution is we need to tackle those barriers. If they don’t speak English, we need to hire someone that’s bilingual. And not just the bilingual teller, we need a bilingual commercial loan officer that can sit down with the Hispanic business customer and say, “Hey, here’s why you’re not borrowed. You’re showing loss year over year in your tax returns. We know that’s not true. Let’s help you get so that your cash flows are positive.”

Same thing on the mortgage side. We’re fortunate now that we’ve got commercial loan officers that are bilingual and Hispanic. Same thing on the mortgage side. I’ll stop because I could talk about this for hours because I’m super passionate about it, but it really boils down to intentionality and then also hiring from within, but not just hiring them. You got to give your bankers a fighting chance and give them responsible products and reactive products so that they can easily live in these communities.

Sydney Diavua

Miguel, I know you stopped, but I’m going to come back to that one because we’ve got a great question in the queue around that. Wes, I do want to come to you before we go to our audience questions to hear a little bit more about the innovation center that you all have launched.

Wes Burns

So in September of 2023, so just a few months ago, Midwest Bank Center partnered with a nonprofit in North County, St. Louis that had identified a blighted property. It was an abandoned grocery store and retail center that had set vacant for over 20 years. So as you can imagine in an urban setting and become a drug haven, just crime ridden. This nonprofit took this property with the intention of bringing access to services, left it at that, and determined the needs that had been underserved and that community for decades. Those needs weren’t just banking, of course. They were access to pharmaceuticals, so the pharmacy is now open there. Access to job training and employment center is now there. Small business incubator center that most affluent communities have one after the next, of course, this community did not have such an option.

They also identified the need for affordable early childhood education, so an early childhood provider has moved in. And of course we partnered with them to become the banking provider. And as far as innovation goes, we’re trying new things there. It’s a 1000 square foot building, so it’s not an ivory palace by any stretch of the imagination. But we found through surveying the community, and I think that’s an important point to make here, surveying the community to find out what the needs of the community are. Not just the bank that comes in with a product offering that says, here’s what you need. That oftentimes doesn’t work. So we spent time surveying the community with the community stakeholders, determining what their needs were, and we’re trying things out. We’re failing fast. If the hours that we’re providing are not what the community needs, we’re shifting. We’ve already shifted our hours once. It’s been six months.

We’re also looking at what product needs there are out there. Within five miles of this location, there were 35 predatory lending businesses that are taking away, as Caleb said earlier, just taking from the community. And the question is why do people go to predatory lending businesses? I think the assumption would be, or at least my ignorance at that time would’ve been, they have no other options. Well, that’s true in the respect that there aren’t banks that are providing that type of product offering that can get cash in their pockets quickly. One example of a lady that provided a response was, I had a $500 need because the transmission in my vehicle went out. I needed cash to get my transmission fixed to go back to work. Banks would’ve taken too long. Banks are not approachable at the time in her opinion, and she’s probably right.

So our intention there is to have a very small footprint, one that’s welcoming when the customer walks in. We have rolled out a predatory lending payday alternative product that tries to compete with the 400% interest rates and fees that Caleb mentioned earlier. And we’re trying it out. It might work, it might not, but unless we do something different, nothing changes in these communities. So that’s one of the elements of innovation that we’re trying, is new product offerings. And not just offering the affluent client products that we have in other markets, but trying to be customized to solve for the needs of all communities. And then as it relates to technology, we’ve installed our first ITM with the intention of making this a cashless branch. The obvious reason behind a cashless branch opportunity is safety and soundness and security for our customers that use it and for the employees that we have there.

But also, we’re trying to test the market to see if all communities have the desires to interact digitally. And we’re testing this market. Again, this may work, this may not, but we’re trying. It goes back to, I think Mike made a good point earlier about their mobile banking location, the opportunity to bring mobile location to underserved communities. It’s novel, and I think it’s something that if banks start doing things a little bit differently, change can be inflicted.

Sydney Diavua

What I hear is you’re not only engaging community, but you’re taking a risk, you’re testing. You’re going into phases where you’re testing, seeing what works and engaging the community around that. And that is really a novel. Miguel, you’ve got something.

Miguel Lopez

Yeah. Wes, I commend you for that. That’s a great opportunity. When you hear the statistics of payday lenders and you hear that interest rate, it’s easy to think who would be crazy enough to take that? But you really have to empathize with the folks in those situations and realize why are they doing that? Well, probably they have an emergency and that’s their only chance. And for us in Clarksville, Mississippi, there’s 12 payday lenders in a one-mile radius from our branch. So from an innovation standpoint, one of the things we’re focusing on is how do we compete with them in a responsive and a reactive way? So one of our initiatives right now is a money on demand digital app platform where we want to compete with those payday lenders in a more sustainable way. Because, going back to what you’re competing with, you’re competing with folks who…

I read a statistic once that half of Americans are a $400 emergency away from bankruptcy. When that happens to someone and the only person in town is one of those 12 payday lenders that say, “Yeah, we’ll give you $400 right now out the door.” We as banks can’t sit on the sideline and say, “Well, why are people taking this high expense of money?” We got to be part of the solution and not part of the problem.

Sydney Diavua

Thanks, Miguel. So I’ve got a question from our audience, and it’s about just the relationship with your customers because you all seem to have really built strong relationships between those consumers who are utilizing your branches. So how does the branch relationship hold up when a customer moves away from your market? Do they still reach out to you for capital needs when they’re outside of your market? So I’ll open it up to anyone who wants to jump in. Mike, you look like you want to say something.

Mike Anderson

We’re in a situation where we’re growing. We’re like seven years in this market, so we’re still growing. But in my prior life, people bank with people. So if there is a situation where in this mobile society, especially if you’re looking for a larger regional or national bank… You could live in Seattle, Washington and live in Florida in the winter months, and you can still deal with your banker up in Seattle with bank technologies these days. So I still think people stay connected, but the people that tend to rely on branches, they bank there for a reason. They bank there because that’s where their people are. That’s where their person is. And for somebody that’s gone through a number of mergers in Western New York over the last 15 years in this banking environment, you don’t see a lot of people moving from different banks because of just what the name of the bank is on the front of the building.

They’re banking there probably most likely based on Caleb’s data that it’s convenient because it’s in a close proximity. But I would bet the number two is because they have a person there that they trust and they’ve built that relationship with, and that’s why they do that.

Sydney Diavua

So I’m going to come back to a question that I said I’d put a pin in earlier around workforce and who’s serving the customers and the consumers. And so Miguel, I’ll go to you with this one. How do you see these trends affecting the financial industry’s workforce and how can workforce development services better serve clients and better serve… How can they better prepare a workforce for these shifts in the financial institutions?

Miguel Lopez

So are you talking about jobs within banking?

Sydney Diavua

Yes.

Miguel Lopez

I love that question. As someone that’s a person of color and an immigrant and working in the financial industry, one of my life’s passions is to get more folks that look like me in banking, especially when you’re a banker in the deep south. And it’s important because as our population gets more diverse, if your bank doesn’t reflect the community that you serve, you’re going to struggle getting those customers. I’ve heard this from some of my other banker friends, and they say, “Well, it’s really tough for X and y reason.” And what I always say to them, “It’s not a talent acquisition problem, it’s a talent recognition problem.” And what I mean by that is the reason Miguel Lopez is on the Zoom call today is because someone took a chance on me 10 years ago and gave me my first banking job. I didn’t have any qualification to be a banker, but someone took a chance on me and poured into me, and I followed through with that.

So really, I don’t think it’s a talent because we had that challenge here when I came to Southern. They said, “Hey, let’s go hire commercial loan officers that are Hispanic and bilingual.” There’s less than 10 bilingual commercial loan officers in the state. What I told the leadership team is what we’re going to have to do is we’re going to have to hire and develop. Let’s go to our teller line. Where are our bilingual tellers? And ask them, “Hey, what do you want to do in five years? Do you have the interest and the desire to be a loan officer? And if so, let’s get you on that platform. We have a lending academy here at Southern where we want to coach.” I’ll summarize it this way because I can talk about this for a while, but if you picture a glass of milk and you pour chocolate in it, now it’s diverse.

You got the chocolate at the bottom and the white on top, but you don’t get inclusion until you stick the spoon in there and stir it up. And that’s what we as financial institutions need to do; we can’t just hire Hispanic and African-American folks and keep them at the teller line. We need to hire them to get them in the door, but also put them on a path based on their interest and the company’s goals so that they can move up to lenders, market presidents, compliance officers, what have you, and really have that inclusive banking community.

Sydney Diavua

Thanks, Miguel. So I have one last question for the group before we end our conversation, and I’m going to go around the room, and Caleb, I want you to come in here too. What do you think the future holds for bank branches? And so Caleb, I’ll start with you. If in 30 seconds, each of you all can, tell me, what do you think the future holds for bank branches?

Caleb Bobo

It’s a great question, and it’s one academically I think about a lot, but I’m going to put back on my examiner hat and say I think a lot. We’re going to see a lot more innovation in bank branches. We’re going to see partnerships with community organizations. We’re going to see a product specific to markets because people are busy and to ensure that that branch remains profitable, you need footsteps, you need people in those branches. And to have people in them, you’re going to need to be innovative. And I’m just really excited and curious to see what that innovation looks like. We’ve heard a little bit about it on the call. And there are certainly CRA and fair lending benefits to that innovation, but I think we’re going to see more of that more partnership with nonprofits that build trust, get more people in the door. And if that’s done well, I think it could have a really powerful impact on the personal balance sheets of households and communities, not only through our eight districts here at the Federal Reserve Bank of St. Louis, but across the country.

Sydney Diavua

Thanks Caleb. Wes, what about you?

Wes Burns

Caleb said it well. I think what I would add is digital first. We’re moving to a digital society, if we’re not already there. Maybe I’m just a little slow on that adoption, but smaller, efficient location, digitally focused, I think is the model that everyone will be moving to. But I will say this, you cannot force change on consumer behaviors. So although I think there is evolution happening in the banking industry, there is a segment of our community that will be left behind if we fully adopt certain strategies and forget about what has been historically proven to work. So I think there’s a balance. As we evolve as an industry, we cannot forget the demographics that Kayla outlined earlier, whether that’s the elderly lady that likes to cash for a 10 cent dividend check on the Friday when she receives it. If the bank goes away or changes to be such a digital strategy, you lose the ability to serve her. So we can’t lose sight of that.

Sydney Diavua

Miguel?

Miguel Lopez

I think I would sum it up with one word, and that’s intentionality. I think gone are the days where a bank could just build a branch and in three years it’d be profitable. I think bankers and banks are going to have to be more intentional on who they hire, what services they offer, but also on partnerships. As a CDFI, we’re in a unique position to partner with non-CDFI banks. We’ve done that with Bank of America, some of the larger banks and even some of the smaller regional banks. So I think really just being intentional, but also, you’re going to have to drive that foot traffic to your branch. You can’t just put on a corner lot and think people are going to walk in. And the way you do that is through intentional hiring, programming. We have an opportunity center in our branches where folks come in for non-banking related services, hey, fix my credit, do my taxes. That helps drive a lot of our foot traffic, and if we’re doing our job right, can also help us on the conversion side, on the deposits and loan side.

Sydney Diavua

Thanks, Miguel. And Mike, we’ll end with you.

Mike Anderson

I think what Wes said, digital first. I’ve seen this start to evolve already, but I think you’re still going to see branches more strategically aligned, maybe a hub and spoke type of mentality where you might be in major metropolitan areas that have a larger footprint and then smaller spoke branches in rural areas or less populated areas. I think you’ll see more digital walls. You heard Wes talk about ITMs. We’ve started those here. So ITMs give you longer extended hours where you can do regular bank branching. So you’ll see more self-service and self-guided digital walls in branches. The days of having a 2000 square foot branch in a suburban plaza with this huge parking lot and this huge drive through canisters. You’ll see smaller footprints, maybe in some cases on a busy urban setting street, maybe a 400 square foot little office with a digital wall and just a little office where people can consult about doing a mortgage or talking about financial planning.

So it’s going to be a combination of multi-channel, but also very strategic in when we put the brick and mortars. But there’s definitely still a need and technologies that help us deliver to everyone.

Sydney Diavua

Thanks, Mike. So digital first, partnerships, intentionality is what I hear from you all. I just want to thank you all again. Thank you to our speakers for providing such insightful information and engaging our audience today. And attendees, thank you for spending your valuable time with us today. But before we end the session, we do have a few requests. Please complete the survey. We’ll send it to you immediately after today’s event so we can improve and continue to bring you timely and relevant topics.

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